The most common thing everyone asks when they avail a loan is “What are EMIs? How do I know how much I have to repay every month to clear my loan?”

Understanding EMIs and amortization tables is probably the most confusing part of the entire process of availing any kind of loan. The EMI, or Equated Monthly Instalment, is important because it signifies monthly outflows towards repayment of the loan.

In order to calculate EMI for your loan, you should first understand its components:

Components of an EMI

Loan Amount: This is the amount borrowed from the lender. As the loan amount increases, the EMIs to be paid also increases.
Loan period or tenure: This is the duration within which the loan has to be repaid, inclusive of interest. EMIs can be adjusted by altering the loan period. By extending the loan period, the amount of EMIs payable can be reduced and vice-versa. While shortening the loan period results in higher monthly outflows, lengthening it results in a larger interest component.
Loan Interest Rates: Interest rates can be either fixed or floating. Floating interest rates change according to fluctuations in market rates. Fixed rates remain unchanged for a considerable duration of the loan period or until maturity depending on the loan agreement.

Calculating EMIs

The formula consists of using the loan amount, interest rate and tenure of the loan (in months): to find out your EMI (Equated Monthly Instalments)

M = No of months to pay the loan
I = (loan interest rate per annum / 12) / 100
L = Loan amount
(Loan amount x Interest rate/12) x ((1+ interest rate/12) ^ loan tenure in number of months) / ([1+ interest rate/12) ^ loan tenure in number of months]-1)
For example: A person has taken a loan of Rs. 5 lakhs from the lender with an interest rate of 12% for 10 years.
In this case:
M (Loan period in months) = No. of Years X 12 = 10 X 12 = 120
I (Interest rate per year/ 12) = (12/100) / 12 = .01
L (Loan amount) = Rs.5,00,000

• EMI, to be paid is Rs. 7147
• In the 10 years the total payment made by the person to the lender (EMI X Total tenure in months (7174 X 120) is Rs 8,60,880
• The total interest rate will come around (Total payment – loan amount) Rs. 3,60,88

Most of us do not know how loan EMIs are calculated. Yet, we make payments as per the repayment schedule set out by our lenders, without checking its accuracy.
Contrary to what most of us think, it is actually quite easy to calculate loan EMIs. It is done using a simple formula.
Data required to perform this calculation are the loan amount, monthly interest rates and the loan tenure in terms of months.
Example:
Suresh takes a loan of Rs.1 lakh with an 11% p.a. He has to pay back the loan in 15 years. The formula to calculate loan EMIs is as follows: (Loan amount x Interest/12) x [(1+ interest rate/12)^loan tenure in number of months] / ([(1+ interest rate/12) ^ loan tenure in number of months]-1}
Answer:
EMI = (100000 x .00916) x ((1+.00916) ^180) / ([(1+.00916) ^180] – 1)
EMI = Rs 1,136.
Note: The rate of interest is 11 percent per year which is divided by 12 months to get the monthly interest which comes to = .00916

EMIs can be broadly classified as EMI during loan disbursal or EMI after you get the loan.

Pre-EMI

Pre-EMIs are payments made towards the interest component on a loan which is being disbursed in parts.

For example: You avail a home loan of Rs.5 lakhs and the bank disburses the loan in instalments of Rs.1 lakh each at each stage of completion of the house being funded. Once the first instalment is disbursed i.e.Rs.1 lakh, the borrower begins making interest payments. Pre-EMIs do not reduce the principal component of the loan amount..

Advantages of Pre-EMIs

• The actual EMIs due will be less the entire loan amount has been disbursed.
• This is an economical alternative to paying total EMIs i.e. interest + principal. Pre-EMI payments are lower comprising only interest payments.

Disadvantages of Pre-EMIs

• Longer loan tenures as principal repayments begin only after the entire loan amount has been disbursed. This leads to higher interest charges.

Full EMI

Here, EMIs i.e. interest + principal are repaid only once the entire loan amount is disbursed.

Advantages of Full EMIs

• No payments required until the entire loan is disbursed
• Loan periods are shorter compared to Pre-EMI options.
• Income tax rebates are higher, given higher EMI payments as compared to Pre-EMI options.
• The total loan amount outstanding reduces from the first EMI since payments made go towards reducing the principal and thereby the interest due.

Disadvantages of Full EMIs

• EMIs remain the same throughout the loan tenure
• Higher EMIs as compared to Pre-EMI options which results in lower personal disposable income.

Pre EMI or Full EMI? The choice is yours.

If you plan to sell the house, or are expecting large income inflows orare anticipating higher returns from the property funded by the loan, it is better to opt for Pre-EMIs. However, if you are not sure and do not want to take any undue risks, Full EMIs are a better option.

Manoj Kumar, 29, a Bangalore-based MNC employee, fulfilled his dream of owning a new a car in 2010. He bought a car for about Rs 5.95 lakh. He managed to do this by availing a car loan. The down payment he was required to pay was Rs 1.5 lakh and the remaining amount was funded by his auto financier. The car loan interest rate was 12% p.a. and the loan tenure was set at four years. As per the terms of the agreement, he currently pays a monthly EMI of Rs. 11,700. Manoj goes by the payment schedule as set out by the bank. But, how does he verify the amounts payable as per the schedule? Is there any way he can reduce or increase the EMI based on his financial situation?

Calculating EMIs can be confusing and tedious. There are many borrowers who find it hard to understand EMI calculations and Manoj is no exception. Most borrowers are unsure whether they are paying the right amount as EMIs; in many cases, the lenders themselves may have erred in their calculations.

The irony of it all it that EMIs are not that hard to understand. Using MS Excel, a very popular tool used the world over, anyone can easily calculate the amounts due as EMIs.

MICROSOFT EXCEL FOR EMI CALCULATION

An Excel spreadsheet is a software specifically designed for mathematical calculations and performs calculations using a number of preset formulae. This makes it one of the most convenient tools to calculate and understand EMIs or repayment schedules.

STEPS TO CALCULATE LOAN EMIs USING EXCEL

To calculate loan EMIs using Excel, you have to use the function ‘PMT’ . You will need to know the rate of interest (rate), the tenure of your loan (nper) and, the value of the loan or present value (PV). Apply this to the formula: =PMT(rate,nper,pv).

Example:
Let us consider Manoj’s case and calculate the EMIs on his loan using an Excel sheet.
Note that the rate of interest for calculating the EMI on your loan must be the monthly interest rate In Manoj’s case it is 12%/12=1% or 0.01.
The tenure of the loan has to be considered in terms of the total number of months
In Manoj’s case it is 4 yrs. and 12 months = 48 months or 48 EMIs.
Applying this data in the formula
=PMT(0.12/12, 4*12, 445,000)= 11,718
The result is displayed as a negative value. This is the amount to be paid as EMI.

ADJUSTING PAYMENT FREQUENCIES

If you were to choose a different frequency, say a quarterly payment schedule as opposed to monthly payments, all you would have to do is factor this into the formula to get the desired results.

Example:
Consider quarterly installments for a loan of Rs 10 lakh at 10% interest p.a. for a loan period of 20 years.
In this case, the interest rate and loan period will not be considered in terms of the total number of months but in the total number of quarters.
Interest rate = 10%/4
Loan period = 20 years * 4 quarters per year = 80 equated instalments
Apply this data to the formula as described above and the quarterly payments due over the loan period will be displayed.

Its really as simple as plugging in data and receiving results, completely eliminating confusion and anomalies. This not only helps you as a borrower in choosing the right loan plan but also helps you adjust your EMIs according to your financial situation.

HDFC Bank offers various loan products meant for customers of different demographics and incomes. Calculating EMI on any of the loans can be done through a few simple clicks at BankBazaar which specializes in providing free financial services to customers and general visitors.

Availing loans can be a very tricky proposition if you don’t know the underlying details such as EMI amounts, interest rates, processing charges and amortization. You may be looking for a car loan, personal loan, or even a house loan, and the best place to begin your search starts from the Internet.

BankBazaar offers a dedicated EMI Calculator tool that will provide you with information regarding the loan break-up and amortization details. You can access this tool by following these steps:

• Open BankBazaar.com and scroll to the option titled ‘Financial Tools’ at the top right corner of the web page.
• A drop-down menu will appear with two options – EMI Calculator and Finance Calculator. Scroll to the EMI Calculator tag.
• Next, you will see three options under the EMI Calculator – Car Loan EMI Calculator, Home Loan EMI Calculator, and Personal Loan EMI Calculator.
• Click on the option most relevant to your loan type.

Once you select an option as detailed above, you will be taken to a new page with different dynamic fields. To use the HDFC Loan EMI Calculator, please follow the steps outlined below:

• Loan Amount: This field is represented by a scale. Move the pointer by dragging or clicking on the appropriate loan amount you are planning to borrow.
• Tenure: This field is again denoted by a scale. Drag the pointer to relevant tenure value that you are planning to repay your loan in.
• Interest Rate: Self-explanatory. The interest rate details for various loan products from HDFC Bank can be found at BankBazaar’s dedicated section on HDFC loans. You can also source the interest rate from the official website or by contacting the nearest HDFC Bank branch. This field will have a default value, so please change it before proceeding further.
• Processing Fee: This fee varies from product-to-product. Once again, you can find these details at BankBazaar by navigating to HDFC loan pages. This field will also have a pre-defined value – you simply have to change it to the applicable values for your loan product.

Once you are done with filling the details, click on ‘Calculate’. The results will appear just below the ‘Calculate’ button. The results are shown in terms of ‘Your Monthly Car/Home/Personal Loan EMI’, ‘Loan Break-up’ and ‘Amortization Details’.

EMI Amount: The monthly amount you have to repay for your particular loan product, according to the details entered by you.

Loan Break-up: Loan Break-up section will show details such as the loan amount, total interest payable, processing fee, and the total repayable amount. The results are also shown aesthetically in graphical format.

Amortization: This result will show details of the amount to be paid at any point during the loan tenure such as principal paid, interest paid, outstanding balance, and total payment made.